A few years ago, investors who took a chance on Afterpay when it was just a penny stock trading for cents on the ASX saw their small investments turn into life-changing gains as the company soared past $100 per share. Stories like these fuel the excitement around the best small-cap stocks, where the right pick can deliver massive returns. While not every Australian penny stock will become the next big thing, the ASX has a history of producing hidden gems under $1 that later dominate their industries. If you’re looking for cheap stocks to buy today, spotting early-stage companies with strong fundamentals and growth potential could lead to the next big multibagger opportunity. In this blog, we highlight three promising ASX penny stocks that could be worth watching right now.

Peter Warren Automotive Holdings Limited (ASX: PWR)

Peter Warren Automotive Holdings Ltd. is a holding company, which engages through its subsidiaries in motor vehicle dealership services. It operates through the Vehicle Retailing and Property segments. The Vehicle Retailing segment offers a diversified range of automotive products and services, including new vehicles, used vehicles, vehicle maintenance, and repair services, vehicle parts, extended service contracts, vehicle protection products, and other aftermarket products. The Property segment holds commercial properties principally for use as premises for its motor dealership operations. The company was founded by Peter Warren in 1958 and is headquartered in Sydney, Australia.

From the company reports:

FY24 Highlights:

Peter Warren Automotive Holdings Limited (ASX: PWR) has recently released its financial results for the fiscal year 2024, concluding on 30 June 2024. 

The company reported a sales revenue increase of 19.4%, which includes a contribution of 13.1 percentage points from acquisitions and 6.3 percentage points from growth in new and used vehicle sales, as well as service, parts, and aftermarket products.

The gross margin percentage experienced a decline from 18.9% in fiscal year 2023 to 16.9% in fiscal year 2024, primarily due to a decrease in new vehicle margins by 1.2 percentage points and the effects of newly acquired dealerships, which accounted for a 0.7 percentage point reduction. 

Over the past year, new vehicle inventory has increased, prompting the company to enhance its inventory management strategies. 

As of June 30, the company maintained its new vehicle inventory levels (excluding acquisitions) at $363.9 million, compared to $362.4 million on December 31.

The underlying operating expenses benefited from effective cost management, resulting in a decrease from 12.2% of revenue in fiscal year 2023 to 11.5% in fiscal year 2024. 

The company’s property holdings are valued at $226 million, with a net debt loan-to-value ratio of 27%. 

Additionally, the company has announced a fully franked final dividend of 6.0 cents per share, culminating in a total annual dividend of 14.5 cents per share.

5-Year Financial Snapshot:

PWR has demonstrated strong revenue growth over the past five years, with revenues soaring from $1.37 billion in 2020 to $2.47 billion in 2024. Despite this robust revenue trajectory, the company faced a notable decline in earnings, dropping from approximately $56 million in previous years to $36 million in 2024. This decline can be attributed to significantly increased interest expenses, which doubled compared to prior years, reflecting an over $20 million rise. Overall, while revenue growth remains a positive indicator, the increased cost of financing has impacted profitability temporarily.

Growth Catalyst:

PWR is poised for significant growth driven by the resurgence in vehicle sales following a decline in 2020. The automotive market has seen a robust increase in vehicle deliveries over the past few years, which is expected to generate heightened demand for maintenance and service as these vehicles approach the 2-3 year mark. This age range typically requires more frequent servicing and repairs, presenting a substantial market opportunity for PWR to capitalize on. The company’s established reputation and extensive service network position it well to meet the increasing needs of vehicle owners. Additionally, as consumers seek reliable service providers amidst a growing vehicle population, PWR can leverage this demand to enhance its revenue streams and profitability. By focusing on customer satisfaction and expanding service offerings, PWR is well-positioned to drive sustainable growth in the coming years.

Humm Group Limited (ASX: HUM)

Humm Group Ltd. operates as a financial services group, which engages in the financial products through a network of retailers and brokers. The firm’s activities include a variety of financial risks, liquidity risk, funding risk, credit risk and market risk. It operates through the following segments: PosPP, New Zealand Cards, Australia Cards, and Commercial. The company was founded by David Berkman and Andrew Abercrombie in 1988 and is headquartered in Sydney, Australia.

From the company reports:

FY24 Highlights:

Humm Group Limited (ASX: HUM) reported its FY24 financial results, showcasing a notable recovery and operational improvements.

Statutory net profit after tax (NPAT) surged by 145% to $7.1 million, with a significant second-half turnaround, achieving a $13.1 million profit compared to a $6.0 million loss in the first half. This reflects a remarkable $19.1 million positive swing.

Despite challenges, normalised cash profit after tax declined by 19% year-on-year to $60.6 million. However, a strong second-half performance, with a 16% increase in cash profit to $32.5 million, was driven by a 4% rise in net operating income and a 14% reduction in costs.

The company’s net interest margin (NIM) remained steady at 5.5% across FY24, marking a 40bps improvement compared to June 2023.

Humm maintained robust credit quality, with a Group Net Credit Loss/Average Net Receivables ratio of 1.8%. Additionally, the company delivered $13.2 million in cost savings during the fiscal year, reflecting enhanced efficiency and cost discipline.

5-Year Financial Snapshot:

Humm has showcased a recovery in its financial trajectory despite fluctuations in annual revenues. Revenues, which declined from $478 million in 2020 to $444 million in 2021, have rebounded significantly, reaching $510 million in 2023 and further growing to $620 million in 2024. This growth has supported a recovery in net income, with the company generating approximately $13 million in net income during the second half of 2024 alone. This progress indicates potential for earnings to approach the 2019 levels, where net income stood at around $29 million.  However, net income remains below the $60 million recorded in 2021, primarily due to increased interest expenditures in 2024. It is noteworthy that Humm’s operating income has more than doubled in recent years, climbing from $122 million in 2020 to approximately $300 million in 2024.

Growth Catalyst:

Humm Group has achieved a significant operational turnaround in recent years, driven by strategic initiatives and improved market conditions. The company has implemented major cost efficiencies, notably discontinuing unprofitable products and introducing promising new offerings. This strategic shift has enhanced profitability and operational focus.  A key driver of Humm’s improved performance has been the stabilization of Net Interest Margins (NIMs), supported by a favorable interest rate environment and reduced volatility from rate hikes compared to previous years. The introduction of innovative products, such as the Flexicommercial offering in the finance receivables segment, has significantly expanded the company’s receivables portfolio, which now stands at record levels of approximately $5 billion.   Additionally, the launch of a regulated consumer hybrid loan product positions the company well for future growth. These advancements underscore Humm Group’s ability to adapt and capitalize on market opportunities, paving the way for sustainable financial and operational growth.

MERCURY NZ LTD (ASX:MCY)

Mercury NZ Limited is a New Zealand-based company that generates electricity from renewable sources like hydro, geothermal, and wind. They also retail electricity, gas, broadband, and mobile services to residential and small to medium-sized business customers. Their generation sites are strategically located in various regions across New Zealand, and they operate in both the generation/wholesale and retail segments of the electricity market.

From the Company Reports:

Mercury NZ Limited (ASX: MCY) announced its half-year results for the period ending 31 December 2023.

Key financial highlights include a net profit after tax of $174 million for the half-year, reflecting a decrease of $65 million compared to the prior comparable period. This decline was primarily attributed to higher depreciation, interest charges, and net changes in fair value. Despite significant hydro generation during the period, Mercury reported EBITDAF of $434 million, down $17 million from the prior comparable period, demonstrating a strong performance.

Earnings for the period were positively impacted by ongoing investments in renewable generation and higher prices. Notably, wind generation increased by over 40% to 1,109GWh, driven by the full contribution of generation from Turitea South and the commissioning of the Kaiwera Downs 1 wind farms.

Operational expenditure increased to $191 million, up $31 million, mainly due to higher employee-related expenses and maintenance costs, particularly from wind contracts. Stay-in-business capital expenditure totalled $60 million, representing a $29 million increase, while growth capital expenditure reached $70 million, up by $26 million. These expenditures primarily supported the construction of a fifth unit at the Ngā Tamariki geothermal station and the completion of the Kaiwera Downs 1 wind farm near Gore.

Net debt increased to $1,983 million, up $76 million primarily due to higher interest and tax payments, combined with increased capital expenditure on new generation projects and geothermal drilling.

In December 2023, Mercury successfully integrated Mercury and Trustpower people, processes, and systems, including migrating all Mercury mass market brand customers onto a single technology stack, unlocking benefits from the acquisition of Trustpower’s retail business in May 2022.

The Board declared a fully imputed interim dividend of 9.3 cents per share, representing nearly a 7% increase over the HY23 dividend. Full-year dividend guidance remains unchanged at 23.3 cents per share, marking the 16th consecutive year of ordinary dividend growth. Shareholders can further participate in Mercury’s Dividend Reinvestment Plan with a 2% discount.

Mercury maintained a cash position of $82 million as of 31 December 2023.

Risk Analysis:

The company’s extensive operations in renewable generation are subject to significant exposure and dependence on favorable weather conditions for optimal operations. Given the variable nature of solar and wind power, the overall output of renewable energy producers can also fluctuate. Additionally, integrating large amounts of renewable energy into existing electricity grids presents challenges due to these fluctuations. 

Outlook:

Mercury is committed to expanding its energy generation capacity in response to growing energy demand in the short to medium term. Significant investments are being made to enhance the Nga Tamariki power station, aiming to increase site generation by 390 gigawatt-hours (GWh) and net output by 46 megawatts (MW). The first generation from this expansion is expected in late 2025, demonstrating the company’s strategic focus on capacity expansion. Moreover, the completion of stage one wind farm generation at Kaiwera Downs underscores Mercury’s ongoing efforts to expand its renewable energy portfolio. The company targets reaching a Final Investment Decision (FID) on the Kaiwera Downs stage 2 wind farm (155MW / 525GWh) during FY24, highlighting significant project advancements in the pipeline. Additionally, Mercury is maintaining a strong exploration focus through its geothermal drilling campaign, with $46 million already invested in the campaign. An additional $114 million is expected to be incurred towards the campaign through FY26, reflecting the company’s commitment to exploring and leveraging geothermal resources for energy generation.